In a DerivSource webinar held April 3rd 2019 with AcadiaSoft, a panel explored the structure of a UMR implementation plan that supports phase 4 and 5 firms’ specific needs and enables these firms to comply with the margin rules in both a timely and cost-effective manner through the use of established industry resources. In this feature, AcadiaSoft reps addresses some of the audience questions asked during the busy webcast including questions about Initial Margin (IM) and ISDA’s Standard Initial Margin Model SIMMTM. For further details on any of these questions, experts at AcadiaSoft are on hand to assist. Contact us via info@acadiasoft.com
AANA and Rules Questions
1.Are AANA calculations based on notional Cost or Market Value?
AANA is calculated on an average daily notional amount of uncleared swaps (non-cleared security based swaps, FX forwards including physically settled FX, FX swaps). Firms should use Market Value notional. More info.
2. Are both cash and securities allowed as eligible collateral for IM under US rules?
Yes, however cash must be transformed into forms of eligible collateral in a timely fashion.
3. How can we monitor the threshold on a multi managed fund?
Firms would need a view across the principle vs the trading relationships, that would be across all asset managers and principals who face off directly to each dealer counterpart.
4. Can you explain how the 50 million IM threshold works?
The 50MM is the maximum allowed threshold defined by the regulations, it is the amount firms can grant their counterparties based on counterparty risk assessments. The threshold is on a counterparty group to counterparty group basis and is there to reduce the amount of collateral that needs to be exchanged to lower operational risk. No collateral needs to be exchanged unless you go over your agreed upon threshold amount.
5. Is AANA calculated at the LEI level or at the firm level?
All entities that are (or that would be if US accounting rules applied) included in the same consolidated financial statements as the relevant trading entity. More info.
6. What type of OTC trades and Maturities would make up 8 billion requirement? Would Short terms FX fall within scope?
AANA is calculated on an average daily notional amount of uncleared swaps (non-cleared security based swaps, FX forwards including physically settled FX, FX swaps). Firms should use Market Value notional. More info.
7. Touching on the $50M threshold – if there are discussions around implementing a lower threshold in the CSAs, what are the primary reasons for asking for a lower threshold? Credit worthiness? Is there any consideration around changing the threshold based on the change of credit worthiness of a counterparty?
Yes, credit worthiness would be a key consideration in an IM threshold that would be set at an amount lower than the regulatory maximum. Yes, IM thresholds could be adjusted based on a change in credit worthiness.
8.How can we run ANAA calculations when it is on the entire fund and we only manage a portion of the fund?
You will need the full view of the fund to accurately calculate AANA. You should contact the beneficial owner for whom you manage a portion of the assets to have them tell you whether they are in-scope for the regulation or not.
9. How are Tier 5 entities determining whether or not the threshold is breached with each trading counterparty, as most Tier 5 entities do not have the ability to calculate SIMMTM yet? The outcome of this analysis will drive operational requirements vis-a-vis custodial and documentation requirements, as per the recent announcement from BCBS/IOSCO.
AcadiaSoft is developing a monitoring tool, it will have the flexibility for your dealer to calculate SIMMTM on your behalf if your firm cannot. However, it will also be able to calculate SIMMTM for you if you choose to employ the services.
10. Can cash be posted for IM?
Yes, however cash must be transformed into forms of eligible collateral in a timely fashion under US rules.
11. Are all services required if we breach the AANA with only FX Forwards? We would be in scope based on AANA but show zero exposure for IM as FX Forwards are excluded from that calculation. Seems odd to set these segregated accounts up to remain vacant.
Yes, if the current rules remain unchanged, your firm would be in-scope. However, BCBS IOSCO has issued guidance to prudential regulators that firms who are above the AANA threshold but don’t expect to move margin because they are below the $50MM IM threshold can delay their preparations until they are close the point where they must move margin because they are approaching the maximum permissible IM threshold permitted by law.
12. As a follow up to the below Q&A, when calculating AANA at the counterparty group level, is that across all LEIs managed by the Firm or at each individual LEI vs CP?
it is across all entities that are (or that would be if US accounting rules applied) included in the same consolidated financial statements as the relevant trading entity. https://www.acadiasoft.com/umr_compass/calculating-aana/
13.is AANA calculated at the LEI level or at the firm level?
It is at the counterparty group level. More info.
14. Could you please reconfirm the difference btw the AANA calculation method for EU and US?
Please see the AcadiaSoft AANA guide which compares EU and US methods. More info.
15. Can firms use clearing to lower their exposure under the 8bn AANA threshold?
Yes, clearing more of your bi-lateral OTC volume is one method that firms use to reduce their gross notional to get under the 8BN AANA threshold. Another method that firms use is trade compression.
Structural Set Up and Operations
16. Which custodian accounts/structures are required?
Both tri-party and third-party account structures can be used but the overwhelming majority of phase 1,2 and 3 firms all use the tri-party structure.
17. How many new accounts need to be setup by each counterparty for each agreement?
Each party to the CSA will choose their own segregation account provider.
18. If IM posted at a custodian is cash, what restrictions apply to that cash. Can it sit on deposit in a DDA and what restrictions apply to use of that deposit balance by the custodian?
Cash must be transformed into eligible forms of collateral and cannot sit in an account as it must be segregated
19. Are swap participation agreements included in scope for UMR?
Yes, they are in-scope.
20. How do I ensure that my counterparty doesn’t move assets out of his Initial Margin account back to his custody account without my agreement?
Because the custodian or tri-party agent requires approval from both trading parties before funds are moved.
21. How do I reconcile the assets in my counterparties initial margin account. The value of these might drop and he might have to put up more initial margin to bring the value up? Do I get a statement of the assets from my counterparties custodian showing the assets in his collateral initial margin account?
The custodians will send end of day position files showing all settled collateral for you to reconcile.
22.For buy-side, how will Reg-IM interact with discretionary IM that you have to post?
The industry is discussing a few methods, greater of, allocated method and distinct method, for more information please e-mail info@acadiasoft.com
23. Are trades executed pre your in scope date captured in the IM calculation once you need to post IM?
No, only trades post your IM compliance date a in scope. However certain lifecycle events for legacy trades could bring a legacy trade in scope for IM. See the guidance that ISDA has published on this at ISDA.org.
24. What if the trade counterpart does not use the same Agent? How/where do we send the IM? Is there an arrangement existing between agents?
If counterparties do not use the same custodian, you will need to set up connectivity with your counterparties custodian in order to move collateral and segregate it.
Models
25. Is the $50 mm breach determined using SIMMTM margin methodology or using the existing agreed upon methodology with the counterparty?
Under the regulations you can use a model such as ISDA SIMMTM (which is the only model currently used) or the standard schedule as prescribed under the rules.
26. Ideally, IM numbers computed by different parties should be same since they are using same SIMM methodology but there would be still differences using different systems. How do we expect to resolve those on daily basis?
Yes, calculated SIMMTM on two sides of the same agreement can be different because of multiple reasons. The investigation of these differences are done on the AcadiaSoft’s IM Exposure Manager which is market standard. Once root cause of the difference is identified, resolution happens via bilateral discussions.
27. Because the rules only apply to new trades, are dealers capable of splitting legacy vs. new trades for purposes of SIMMTM calculations?
Yes they will start with the portfolio day 1 when a firms is in scope and move forward from there to calculate ISDA SIMMTM.
Tools and Assistance
28. What tools are available in the market to calculate GRID or SIMMTM, especially for Phase 5 counterparties?
You can ask your dealers to give you their estimate of your exposure at different intervals using SIMMTM or you can ask a vendor to help you calculate SIMMTM or GRID. Another quick but effective way is to do a scheduled based estimate of IM exposure and then approximate SIMMTM based on product type. Click for more info.
29. Will AcadiaSoft offer any IM monitoring or calculation service?
Yes, the service is being developed as we speak. We will keep firms abreast of our progress in our regular working group calls and then as we get near completion via press release to the wider market.
30. Does Acadia have any ready to use product in market to calculate SIMMTM in house?
Yes AcadiaSoft has an out of the box service for firms to calculate their own SIMMTM numbers and match them against your counterparty.
32. Who is involved in the phase 4 working group and is it beneficial for us to join this?
Only firms in-scope to move initial margin on September 2019 are eligible to join AcadiaSoft’ s IM phase 4 working group. If your firms is in-scope for IM phase 5 – please consider joining AcadiaSoft’ s IM phase 5 working group that will meet on a monthly basis until January 2020 at which time the meeting frequency will change to bi-monthly. Please contact info@acadiasoft.com for more information.
33. Does AcadiaSoft compute SIMMTM sensitivities or do you use an external consultancy to do this?
AcadiaSoft partners with Quaternion, a Risk Management firm for sensitivity calculation service. Firms can contract directly with AcadiaSoft for Sensitivity calculation.
